MARKET COMMENT
Buy-To-Let For Beginners

By David Kuo (TMFDragon)
December 5, 2002

Buy-to-let can be a potential minefield for the uninitiated. However, many investors are still prepared to learn the hard way, that is through their own mistakes. This is because the potential returns can be too attractive to miss out on, or so it seems. Just think, if you had sunk your life savings into an "average" house worth just £90,000 a year ago, that property today would be worth around £117,000 today. That's a capital gain of £27,000 or a return on your investment of some 30%. The percentage return would have been even greater had you geared up by using a mortgage.

However, buying a property in the expectation of letting it out is not quite as easy as it seems. Key considerations include the right type of property and the locations. You can almost guarantee that the property that you buy will be the wrong one. It will either be on the wrong side of the street or just that little bit too far away from the local shops. Then there's the need to find your tenants and mange those tenants and the property competently. That all costs money. Factor in some void periods when the property will lie vacant, and the returns start to look less attractive by the minute. Then there is the added worry that perhaps the property bubble could go pop and bang goes the potential capital gain and your expected return on investment.

For those that still believe the property market will remain buoyant, there are perhaps other less risky options. One such alternative is Grainger Trust (LSE: GRI), a specialist in residential property letting, and a member of the FTSE 250 Index. Grainger Trust today posted a doubling of full-year profits to £45m and hiked its final dividend by 15% to 11.13p. Shares in the company have appreciated 30% this year, mirroring to a large extent the rise in property prices over the same period.

However the company was cautious over the immediate future of the property market. It commented on the slowing of the residential property market particularly in London and the South East. It added that it was conscious that the rate of increase could not be sustained over the long-term. Additionally it has disposed of 785 properties this year, 7% more than last year and said it was being increasingly cautious to market conditions. That is not a good sign for the near-term prospects for the residential property market. Mervyn King, the Deputy Governor of the Bank of England, once said that no one who is honest knows what will happen to house prices and by that token Grainger Trust is not a risk-free option. But then disposing of Grainger Trust shares will be a whole lot easier than trying to sell a house should the housing bubble burst.